Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Equity (Deficit)

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Stockholders' Equity (Deficit)
3 Months Ended
Mar. 31, 2013
Notes to Financial Statements  
NOTE 6 - Stockholders' Equity (Deficit)

Common Stock

 

The Company did not issue any shares of common stock during the three months ended March 31, 2013, and had 23,218,117 shares of common stock outstanding as of that date.

 

Common Stock Payable

 

The Company has an earn-out commitment associated with the acquisition of Boomtext from Digimark, LLC. The earn-out payment (payable March 31, 2013) consists of a number of shares of common stock of the Company equal to (a) 1.5, multiplied by the Company’s net revenue from acquired customers and customer prospects for the twelve-month period beginning six months after the closing date, divided by (b) the average of the volume-weighted average trading prices of the Company’s common stock for the 25 trading days immediately preceding the earn-out payment (subject to a collar of $1.49 and $2.01 per share).

 

As of March 31, 2013, the estimated value of the earn-out payment of $1,711,490 has been recorded as common stock payable in stockholders’ deficit. As of December 31, 2012, the estimated value of the earn-out payment of $2,032,881 was recorded as a current liability.

 

The Company expects to issue approximately 1,148,000 shares of common stock in satisfaction of the earn-out payment during the second quarter of 2013.

 

For the three months ended March 31, 2013 and 2012, the Company recorded a gain related to the change in the estimated dollar value of the earn-out payable of $305,712 and $60,651, respectively, which are recorded in other income/(expense) is the consolidated statement of operations.

 

Stock-based Compensation

 

2010 Incentive Stock Option Plan

 

In December, 2010, the Company adopted the 2010 Incentive Stock Option Plan (“the 2010 Plan”), subject to shareholder approval within one year. Shareholder approval was not obtained within one year, therefore incentive stock options granted under the 2010 Plan converted to non-qualified stock options. The 2010 Plan permits the Company to grant up to 3,124,000 shares of common stock and options to purchase shares of common stock. The 2010 Plan is designed to retain directors, executives and selected employees and consultants and reward them for making major contributions to the success of the Company. These objectives are accomplished by making long-term incentive awards under the 2010 Plan thereby providing participants with a personal interest in the growth and performance of the Company.

 

The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price that equals the fair market value of the Company's stock at the date of grant. These option awards generally vest based on four years of continuous service and have five-year or 10-year contractual terms.

 

A summary of option activity under the 2010 Plan from December 31, 2012 to March 31, 2013 is presented below:

 

                Weighted -        
          Weighted -     Average        
          Average     Remaining     Aggregate  
    Number     Exercise Price     Contractual     Intrinsic  
    Outstanding     Per Share     Life (Years)     Value  
Outstanding at December 31, 2012     1,955,000     $ 0.77       4.44     $ -  
Granted     375,000     $ 0.25       4.95          
Exercised     -     $ -       -          
Canceled/forfeited/expired     (67,709 )   $ 1.19       3.80          
Outstanding at March 31, 2013     2,262,291     $ 0.67       4.34     $ -  
                                 
Options vested and exercisable at March 31, 2013     724,577     $ 0.90       4.34     $ -  
                                 
Unrecognized expense at March 31, 2013   $ 696,493                          

 

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing price at fiscal year-end and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the date indicated.

 

The total number of shares vested and the fair value of shares vested for the three months ended March 31, 2013 and 2012, respectively, was:

 

    Number of Options Vested     Fair Value of Options Vested  
Fair value of options vested during the three months ended March 31, 2013     168,125     $ 103,184  
Fair value of options vested during the three months ended March 31, 2012     398,636     $ 184,839  

 

The following table summarizes information concerning options outstanding at March 31, 2013:

 

Awards Breakdown by Range as at March 31, 2013  
      Outstanding     Vested  
Exercise Price     Outstanding Stock Options     Weighted Average Remaining Contractual Life     Weighted Average Outstanding Exercise Price     Vested Stock Options     Weighted Average Remaining Vested Contractual Life     Weighted Average Vested Stock Price  
$ 0.25 to $0.69       1,747,500       4.34     $ 0.38       421,873       2.73     $ 0.32  
$ 1.16 to $1.80       514,791       6.23     $ 1.65       302,704       6.57     $ 1.70  

 

The following table summarizes information concerning options outstanding at December 31, 2012:

 

Awards Breakdown by Range as at December 31, 2012  
      Outstanding     Vested  
Exercise Price     Outstanding Stock Options     Weighted Average Remaining Contractual Life     Weighted Average Outstanding Exercise Price     Vested Stock Options     Weighted Average Remaining Vested Contractual Life     Weighted Average Vested Stock Price  
$ 0.32 to $0.69       1,410,000       3.71     $ 0.43       374,997       2.98     $ 0.32  
$ 1.16 to $1.80       545,000       6.33     $ 1.66       181,455       6.30     $ 1.69  

 

The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors based upon estimated fair values. During the three months ended March 31, 2013 and 2012, the Company recorded stock-based compensation in operating expenses for employees and directors totaling $93,502 and $113,861, respectively.

 

The Company vesting term for employees is generally a 4 year term and vest as follows; the first installment equaling 25% of the grant, shall become exercisable on the first anniversary of the date of the Option, and additional installments shall become exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months. During the three months ended March 31, 2013 and 2012, the Company recorded $64,960 and $92,255 of employee stock based compensation and expects to expense approximately $535,000 of additional employee stock based compensation over the next twelve months.

 

The Company vesting term for directors is generally a 3 year term and vest as follows; in (3) equal annual installments of 33 1/3% of the Shares covered by this Option, the first installment to be exercisable on the first anniversary of the date of the Option, with an additional 33 1/3% of such Shares becoming exercisable on each of the two successive anniversary dates. During the three months ended March 31, 2013 and 2012, the Company recorded $28,542 and $21,606 of director stock based compensation and expects to expense approximately $162,000 of additional director stock based compensation over the twelve months.

 

Valuation Assumptions

 

The Company uses the Black-Scholes option pricing model in determining its option expense. The weighted-average estimated fair value of the employee stock options granted during the three months ended March 31, 2013 and 2012 was $0.14 per share and $0.50 per share, respectively. The ranges of assumptions used during the three months ended March 31, 2013 and 2012 are as follows:

 

    Stock Option Assumptions for the three months ended March 31,  
    2013     2012  
Expected volatility     122.0%     65.0%
Risk-free interest rate   0.42% to 0.60%     0.30% to 0.45%  
Forfeiture rate     16.0%     0.0%
Expected dividend rate     0.0%     0.0%
Expected life(yrs)   2.77 to 3.58     2.77 to 3.58  

 

The expected volatility in 2013 is based on the historical publicly traded price of the Company’s common stock. The expected volatility prior to 2013 is based on the weighted average of the historical volatility of publicly traded surrogates in the Company’s peer group.

 

The risk-free interest rate assumption is based upon published interest rates appropriate for the expected life of the Company’s employee stock options.

 

The dividend yield assumption is based on the Company’s history of not paying dividends and no future expectations of dividend payouts.

 

The expected life of the stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

 

The following table summarizes weighted average grant date fair value activity:

 

    Weighted Average  
    Grant Date Fair Value  
    2013     2012  
Stock options granted during the three months ended March 31,   $ 0.17     $ 0.54  
Stock options vested during the three months ended March 31,   $ 0.61     $ 0.45  
Stock options canceled/forfeited/expired during the three months ended March 31,   $ 0.47     $ 0.26  

 

Warrants issued to non-employees

 

In December 2010, the Company issued 700,000 warrants for consulting services. The warrants vest over a 4 year term and vest as follows: the first installment equaling 25% of the grant is exercisable on the first anniversary of the date of the warrant; and additional installments are exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.

 

In January 2011, the Company issued 200,000 warrants for consulting services. The warrants vest over a 4 year term and vest as follows: the first installment equaling 25% of the grant is exercisable on the first anniversary of the date of the warrant; and additional installments shall become exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.

 

In July 2011, the Company issued 5,000 warrants for consulting services. The warrants vest over a 4 year term and vest as follows: the first installment equaling 25% of the grant is exercisable on the first anniversary of the date of the warrant; and additional installments are exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.

 

In February 2012, the Company issued 25,000 warrants for consulting services. The warrants vest over twelve months beginning on the first monthly anniversary of the grant. The Company terminated the services of said consultant during the year ended December 31, 2012 and the warrants were canceled in accordance with the warrant agreement.

 

As of March 31, 2013, vested warrants totaled 679,575 pursuant to the three non-employee warrant agreements.

 

The warrants issued to non-employees are accounted for as derivative liabilities pursuant to the authoritative guidance for equity based payments to non-employees. The warrants were valued using a Monte Carlo Simulation. See Note 4 for assumptions used in the Monte Carlo simulation.

 

The fair values of the warrants are estimated at the vesting date and are revalued at each subsequent reporting date. At March 31, 2013 and December 31, 2012, the Company recorded derivative liabilities for the non-employee warrants totaling $128,332 and $95,041, respectively. The change in fair value of the derivative liabilities for the three months ended March 31, 2013 and 2012 was a loss of $33,291 and $320,944, respectively, which was recorded in change in fair value of derivative liabilities in the consolidated statements of operations.

 

A summary of non-employee warrant activity under the 2010 Plan from December 31, 2012 to March 31, 2013 is presented below:

 

                Weighted -        
          Weighted -     Average        
          Average     Remaining     Aggregate  
    Number     Exercise Price     Contractual     Intrinsic  
    Outstanding     Per Share     Life (Years)     Value  
Outstanding at December 31, 2012     905,000     $ 0.33       4.10     $ -  
Granted     -       -       -          
Exercised     -       -       -          
Canceled/forfeited/expired     -       -       -          
Outstanding at March 31, 2013     905,000       0.33       3.85     $ -  
                                 
Warrants vested and exercisable at March 31, 2013     679,575     $ 0.33       3.54     $ -  

 

The following table summarizes information concerning warrants outstanding at March 31, 2013:

 

Awards Breakdown by Range as at March 31, 2013  
      Outstanding     Vested  
Exercise Price     Outstanding Warrants     Weighted Average Remaining Contractual Life     Weighted Average Outstanding Exercise Price     Vested Warrants     Weighted Average Remaining Vested Contractual Life     Weighted Average Vested Stock Price  
$ 0.32       900,000       3.86     $ 0.32       677,076       3.54     $ 0.32  
$ 1.75       5,000       3.27     $ 1.75       2,499       3.27     $ 1.75  

 

The following table summarizes information concerning warrants outstanding at December 31, 2012:

 

      Outstanding     Vested  
Exercise Price     Outstanding Warrants     Weighted Average Remaining Contractual Life     Weighted Average Outstanding Exercise Price     Vested Warrants     Weighted Average Remaining Vested Contractual Life     Weighted Average Vested Stock Price  
$ 0.32       900,000       4.10     $ 0.32       620,827       3.76     $ 0.32  
$ 1.75       5,000       3.52     $ 1.75       2,187       3.52     $ 1.75  

 

Warrants issued to note holders

 

As discussed in Note 5 under Bridge Financing, the Company is obligated to issue warrants or shares pursuant to its Bridge Notes. The number of warrants / shares issuable pursuant to the agreements is not known as of March 31, 2013.

 

During the year ended December 31, 2011, the Company issued warrants for the purchase of 688,669 shares of common stock at $2.00 per share in connection with its private placement discussed above under Common Stock. The warrants are exercisable for four years from the date of issuance, and contain anti-dilution, or down round, price protection as long as the warrant remains outstanding. In addition, the Company issued warrants for the purchase of 153,515 shares of common stock at $2.00 per share in connection with the conversion of its outstanding Bridge Notes with a principal amount of $210,000 discussed above in Note 5 under Bridge Financing. The warrants are exercisable for four years from the date of issuance. In October 2012, the exercise price of the warrants was reduced from $2.00 per share to $0.50 per share as a result of the price protection guarantee contained in the warrant agreement.

 

The number of warrants issued to these note holders remains unchanged at March 31, 2013. The estimated fair value of these warrants is included in the “Common Stock and Warrants” derivative value (see Note 4) as of March 31, 2013 and December 31, 2012.